Mining

Deep down under

If it goes ahead, a big takeover will make Xstrata into a global force

THERE is not exactly a rash of takeovers at present, so an agreed $3 billion cash deal was bound to catch the eye. The merging parties are Xstrata, a London-listed but Swiss-based mining group that floated last year with the intention of consolidating its way to global influence, and MIM Holdings, an Australian company with big copper and coking-coal assets. They announced their tie-up on April 7th. If three-quarters or more of MIM shareholders agree to sell, the combined firm will have a diversified metals-and-mining portfolio—and great potential.

Curiously, when it was announced, the case for selling was made by Leo Tutt, MIM's chairman. Where was Vince Gauci, the managing director, widely seen as the architect of an impressive turnaround since he took the job in 1999? A clearly embarrassed Mr Tutt said that Mr Gauci had dissented from the decision to accept Xstrata's cash, believing that the bid undervalues MIM. (It is now a common grouse of Australians that the market is woefully undervaluing their mining businesses.) Mr Gauci will set out the reasons for his dissent in a formal document to be sent to shareholders towards the end of this month.

There are reports that behind the scenes there has been a bitter battle between Mr Gauci and his board. But other than reiterate his valuation thesis, there does not seem to be much that Mr Gauci can say or do to influence the outcome. Xstrata's bid is clever, because it is in cash and because it is structured as a “scheme of arrangement”, a legal form that requires the support of only 75% of shareholders for a bid to succeed. Xstrata says the structure was needed so that its banks would promise to fund the deal (a rights issue is planned eventually to pay them back), but it was clearly influenced by the boardroom split to seek a relatively certain outcome.

Opportunistic? Sure, admits Mick Davis, boss of Xstrata, who was exploring two other potential targets before this one emerged. He reckons it is hard to fault a deal that is immediately earnings accretive and will increase Xstrata's geographic and product diversification. Xstrata will remain, for now, in the shadow of the industry's big three—BHP Billiton, Anglo American and Rio Tinto. But, once MIM has been integrated, Xstrata could bid for further assets. Mr Davis is certainly not lacking in ambition. The main obstacle to Xstrata's success is the possibility that a rival bidder offers more. That would strengthen Mr Gauci's argument—and precipitate a showdown down under.